Weekly Market Review - Insights | Affin Hwang Asset Management

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A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 12 september - 16 september 2022

US Shakes of Tightening Fears, Asia Stays Flat

It was a risk-off week for equities as soaring inflation rattled investors’ nerves. The S&P 500 index tumbled 4.8% last week on the back of a fiery inflationary print for August which remained stubbornly high. The tech-heavy Nasdaq gauge also recorded heavy losses as bets that the US Federal Reserve (“Fed”) would tighten aggressively ramped up.

US Consumer Price Index (“CPI”) for August 2022 suggests that inflation pressures remained stubborn, with headline coming in at 8.3% year-on-year and 0.1% month-on-month.

Core CPI – which excludes energy and food prices – increased by 6.3% year-on-year and 0.6% month-on-month; markedly higher than the 5.9% and 0.3% figures posted in July 2022.

Fed funds futures are now fully priced-in for a 75 bp hike at the FOMC meeting happening Wednesday this week. Bond traders are also expecting a combined 100 bp hike for the Fed’s last 2 policy meetings in November and December. Forecasts for the Fed’s terminal rate currently stands at 4.45%.

In Asia, the broader MSCI Asia ex-Japan closed 2.7% lower on the back of simmering tensions between US and China vying for tech dominance. Last week, the Biden administration announced a new biotech initiative aimed at bolstering domestic bio-manufacturing as well as reduce its reliance on foreign manufacturers.

While the executive order was not a direct ban on China, shares of biotech and other related companies listed in China were heavily sold-down due to the risk of loss of clients and supply chain decoupling. Many of these companies especially the larger ones have a significant customer base located outside of China.

According to Reuters, the Biden administration also plans next month to broaden curbs on US shipments to China of semiconductors used for artificial intelligence (“AI”) and chipmaking tools. The rules would codify restrictions in Commerce Department letters sent to Nvidia Corp and Advanced Micro Devices last month instructing them to halt shipments of several AI computing chips to China unless they obtain licenses.

Meanwhile, US inspectors from the Public Company Accounting Oversight Board (“PCAOB”) have begun reviews of audit records of Chinese stocks listed in US exchanges, known as American Depositary Receipts (“ADRs”). The move is seen as a positive step towards resolving an impasse that would have otherwise resulted in the delisting of more than 160 Chinese companies from US exchanges. All eyes will be on the inspection results when it is completed.

On portfolio positioning, we maintain our defensive stance with an ample cash buffer to cushion against volatility.

Updates on Malaysia

On the domestic front, the benchmark KLCI declined 2.0% week-on-week mainly driven by a sell-off in commodity related names including Petronas Chemicals and Press Metal Bhd as global recession fears grew stronger. In terms of fund flows, local institutional funds were the net sellers last week which contributed to the drag.

In terms of corporate news-flow, there was noise last week of a potential loan moratorium for SMEs which pulled the banking sector lower. However, we view this simply as just noise as SME loans under assistance only make up about 1.0% of total domestic loans with banks having provided sufficient pre-emptive provisions. As such, earnings impact to the sector would be minimal.

In other news, the La Nina weather phenomenon was officially declared for the third consecutive year, something which has only happened twice in history. This implies continued droughts in the Americas and excessive rainfall in countries such as Malaysia and Indonesia.

While this is positive for the plantation sector as it implies soybean production will remain low, we believe this has been mostly priced-in to the all-time high discount of US$600.0 that palm trades at relative to soy which should continue to support crude palm oil prices (“CPO”) in the medium term.

We have been slowly adding to our positions in the plantation sector with the expectation that Malaysian inventory should peak by November of this year.

We also lightly nibbled some of the more structural tech names that have seen major corrections in the prior months. Overall, we remain defensive with cash levels hovering around 20.0-30.0% on average.

Fixed Income Updates & Positioning

Despite the volatility seen in US treasuries and risk assets, the Asian credit market played to a different tune; largely buoyed by strong technical in the IG space as well as improved optimism in the Chinese property sector.

Notably, reports of further easing measures by various local governments across China – except for Tier 1 cities – last week translated to a rally in most benchmark property names; where some of which saw bond prices surged by some 0.25 to 0.75 points throughout the week. By putting the pieces together including (i) the recent flurry of home buying measures, (ii) guaranteed bond issuances, as well as (iii) President’s Xi’s latest statement which highlights forthcoming support and relaxations – we see an evident shift in policy trend and a clear intention by the central government to adequately arrest the ongoing property crisis. Though, a meaningful turnaround for the sector remains to be seen.

On selective credit updates, Tencent secured approval for a new game for the first time since Chinese regulators froze all licensing in 2021, while Tencent Music Entertainment (“TME”) also applied for a listing of its Class A shares on HKEX with trading expected to begin on 21 September 2022. As for the hardware space, AAC Technologies was in focus last week after it offered purchase up to US$100.0 million of its 2024 bonds and up to US$50.0 million of its 2026 bonds, at an early tender price of 88 cents and 75.8 cents respectively. The tender offer should draw a lower-bound for bond prices in the near term. AAC Technologies’ bond curve was up 1 to 3 points last week.

Elsewhere, Fosun International Holdings (“Fosun”) saw the price of its shares and dollar bonds fell on Tuesday following chatters that Chinese authorities have instructed major banks and state-owned firms to conduct checks on their financial exposure to the conglomerate. Fosun later denied the news upon checking with regulators via “various channels”. We currently do not have any exposure to this name.

On the primary front, activities were especially quiet with the exception for a few names including LGFV pricing offerings. We participated in an AUD-denominated bond by the Australia & New Zealand Banking Group (“ANZ”), a 12-year non-call 7 Tier 2 issuance, at a fixed rate of 6.405% for some of our regional portfolios.

Back home, local government bonds saw yields edged higher by some 6 to 10 bps across the curve, in line with the upward movement in US treasuries. The bulk of sell-off were concentrated on the 10-year tenure and below, where the 3-year MGS yield closed the week at 3.41% (+6 bps) and the 10-year benchmark added 9 bps from the week before to settle at 4.14%. The 30-year MGS was not traded in the week, though market bid for the tenure was around 4.64% – some 10 bps above the previous week’s close.

On primary news flow, we saw the roll out of a 3-year MGS auction with an issuance size of RM5.0 billion. Demand for the issuance lagged previous auctions, but still healthy at 1.8x bid-to-cover. We believe that the supply for short duration papers were mostly absorbed by banking players, given the still decent spread relative to the Overnight Policy Rate (“OPR”) and a low likelihood of Bank Negara Malaysia following suit to the US Fed’s more aggressive rate hike stance.

On portfolio update, we took the opportunity to participate in the 3-year MGS auction for some of our funds. As for the corporate bond segment, we continue to take profit from our recent positions such as Sarawak Petrochemical as well as a few AAA-rated names. Currently, our cash levels are around the 5.0-10.0% mark, depending on portfolios.

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